19851

VAT: REGISTRATION AND NOTICE OF SECURITY – Appellant purchased the assets and hairdressing business as a  going concern – the Appellant contended that it was a property leasing business charging the hairdressers chair rentals and service charges – the facts found demonstrated that the hairdressers were either employees or providing services as sub-contractors to the Appellant – Appellant making taxable supplies of hairdressing services to the customers – anticipated annual turnover of £800,000 – Respondents entitled to register compulsorily the Appellant for VAT – the former hairdressing business was run by the same principals as for the Appellant company – the former business owed substantial amounts in unpaid VAT – Appellant posed a real risk to the protection of the revenue – Appeal dismissed with costs order

MANCHESTER TRIBUNAL CENTRE

	SFU BARBERS LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      ELIZABETH POLLARD	  (Member)

Sitting in public in York on 23 August 2006

The Appellant did not appear

Lisa Linklater, counsel instructed by the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION
The Appeal
1.	The Appellant was appealing against the Respondents’ decisions:
(1)	To register the Appellant compulsorily for VAT from 6 August 2004.
(2)	To require the Appellant to give a security of £48,500.
2.	The grounds of Appeal were that
(1)	The barbers who operated out of its premises were self employed persons, and, therefore, the Appellant was not required to account for VAT on the full gross income arising from the barber shops.
(2)	The Respondents had erred in fact and in law in compulsorily registering the Appellant for VAT purposes.
(3)	The Respondents have incorrectly exercised their powers to require a security.  
The Dispute
3.	The Appellant traded as hair dressers from twelve premises throughout Yorkshire. On or about 5 August 2004 the Appellant purchased the business and assets of Fifty Bob Shop Limited from the liquidator of the company. Fifty Bob Shop Limited had been the subject of an investigation by the Respondents which culminated in its compulsory registration for VAT.  At the time of its liquidation Fifty Bob Shop was indebted to the Respondents in the sum of £536,000 for unpaid VAT. Graham Rodgers and Stephen Holt were director and company secretary respectively of Fifty Bob Shop Limited and of the Appellant company.
4.	The Respondents considered that the Appellant’s purchase of the business and assets of Fifty Bob Shop Limited amounted to a transfer of a going concern. Thus the Respondents were required to register the Appellant for VAT with effect from the date of transfer.  On the 9 and 10 August 2004 the Respondents visited the Appellant’s premises in Sheffield and Doncaster and formed the view that the value of the Appellant’s supplies would exceed £56,000, the registration limit for VAT purposes. On 8 September 2004 the Respondents informed the Appellant that it had been compulsorily registered for VAT from 6 August 2004.
5.	The Respondents also considered that the Appellant constituted a risk to the protection of the revenue because it operated the same business as Fifty Bob Shop Limited and was controlled by the former director and company secretary of Fifty Bob Shop Limited. Thus on 19 October 2004 the Respondents issued a notice requiring the Appellant to lodge a security of £48,500 in the event of quarterly returns and £32,300 in the event of monthly returns.
6.	The Appellant contended that it was a property letting business, making exempt supplies to self employed barbers as licensees to occupy land. Thus it was not liable to be registered for VAT with the result that the security required was too high.
7.	The principal issue for determination in this Appeal was whether the decisions reached by the Respondents to register the Appellant compulsorily for VAT and to require a security were reasonable, in the sense that a reasonable body of commissioners considering the evidence at the time the decisions were made could arrive at the same conclusions. 
8.	The determination of this Appeal will depend upon the following findings of fact:
(1)	Did the Appellant’s purchase of the assets and business of Fifty Bob Shop Limited constitute a transfer of going concern?
(2)	 Were the hairdressers supplying their services directly to the customer?
(3)	Did the Appellant constitute a real risk to the protection of the revenue?
The Hearing
9.	The hearing was set down for three days. When the Appellant did not arrive at the appointed time, the Tribunal contacted Mr Rodgers and the Appellant’s solicitors. Mr Rodgers told the Tribunal that his solicitor advised him not to attend but to send a letter instead, a copy of which was faxed to the Tribunal.  His solicitor said that his client had not given specific instructions but was of the view that his client would expect the case to be heard in its absence. The Tribunal advised Mr Rodgers and the Appellant’s solicitors that it would delay the start of the Appeal until 2.00pm in case either wished to attend. If there was no appearance by that time, the Tribunal expected the Respondents to apply for the Appeal to be heard in the absence of the Appellant, and if granted the Tribunal would hear the evidence and take account of all matters including Mr Rodger’s letter.
10.	The Respondents applied to proceed in the Appellant’s absence pursuant to rule 26 of the Tribunal Rules 1986.  The grounds for their application were that the Appellant was aware of the hearing, the Respondents’ witnesses were present to give their evidence and that the matters under Appeal dated back to 2004. We granted the Respondents’ application.
The Evidence
11.	We heard evidence from:
(1)	David Harold Price, the officer who issued the Notice for Security on 19 October 2004.
(2)	Mark Damian Reilly, one of the officers who visited the Sheffield premises on 9 August 2004, and the Doncaster premises on 20 April 2005. He conducted a meeting with Stephen Holt, the Appellant’s company secretary, visited the Appellant’s printers, Barden Print Limited, and attended the creditors’ meeting for Fifty Bob Limited. He was also responsible for the compulsory registration of the Appellant for VAT
(3)	Patricia Ann Neale, the other officer who accompanied Mr Reilly on his visit to the Sheffield premises on 9 August 2004. She carried out another visit of the Sheffield premises on 14 April 2005.
(4)	Paul Hetherington, one of the officers who conducted visits of the Doncaster premises on 10 August 2004 and 14 April 2005.
12.	The Respondents also produced a bundle of documents, which we took account of in reaching our decision.
13.	Graham Rodgers, director and sole shareholder of the Appellant company, sent a letter to the Tribunal. He stated that he did not intend to repeat the same mistakes with the Appellant company that Fifty Bob Limited made in respect of VAT. With this in mind he instructed Stephen Holt to ensure that contracts, which conformed to the guidelines of the National Hairdressing Federation, were entered into with the hairdressers. As far as he was aware the company received rent from each cutter at £150 per week plus a service charge of one per cent.  According to Mr Rodgers, Mr Holt gave him assurances that the proper procedures and contracts were in place. Mr Rodgers disagreed with Mr Holt’s statement that he had refused to run the hairdressing shops in a proper manner and to account for VAT correctly. Mr Rodgers accepted that he should have paid more attention to the day-to-day running of the Appellant company. However, Mr Rodgers spent his time between his two homes in Huddersfield and Marbella, and as a result relied on Mr Holt’s word.
14.	In 2003 and 2004 the Respondents visited hairdressing shops run by Fifty Bob Shop Limited, which was incorporated on 28 January 1998.  Mr Rodgers was the sole director of the company, with Mr Holt as company secretary. The Respondents considered that the hairdressers working in the shops were company employees, which meant that Fifty Bob Shop Limited was liable to account for VAT on the supplies of hairdressing. On 27 April 2004 Fifty Bob Shop Limited was compulsorily registered for VAT with effect from 1 September 1999. On 23 June 2004 the Respondents advised Fifty Bob Shop Limited that it may require a security from it because they doubted that the company had the ability to pay its VAT liability.
15.	 On 5 August 2004 Fifty Bob Shop Limited went into liquidation owing the Respondents £536,000 in unpaid VAT. Mr Reilly attended the creditors’ meeting and discovered that the Appellant had put in an offer to take over the business of Fifty Bob Shop Limited as a going concern.
16.	On 9 and 10 August 2004 the Respondents visited the Appellant’s premises at Sheffield and Doncaster and interviewed the hairdressers using a questionnaire based upon the guidelines agreed between the Respondents and the National Hairdressing Federation. The Officers found that
(1)	There was no formal agreement between the hairdressers and the Appellant.
(2)	The Appellant paid the hairdressers weekly 50 per cent of the takings generated by them in that week. The hairdressers did not pay the Appellant a fixed fee for use of the Appellant’s premises.
(3)	The hairdressers did not have public liability insurance.
(4)	The Appellant fixed the prices for the hair cuts, which it strictly enforced. The Appellant operated weekly targets based on turnover with bonuses paid to managers. Only managers had access to the shop safe from which they paid the hairdressers on a weekly basis.
(5)	The hairdressers could only work during the opening hours set by the Appellant. Very few of the hairdressers interviewed had keys to the premises.
(6)	Working hours, holidays and absence cover for the hairdressers were agreed with the regional shop managers.
(7)	The Appellant supplied the hairdressers with all the equipment necessary for their job including clippers.
17.	The Respondents also obtained two job advertisements placed by the Appellant.  The first advert read: “we are looking for hairdressers/barbers to join the company”. The second stated: “Barbers wanted £200 per week minimum”.
18.	Mr Reilly formed the view that the Appellant’s purchase of the assets and business of Fifty Bob Shop Limited amounted to a transfer of a going concern. There was no break in trading.  Further the Appellant made no significant changes to the business on the takeover from Fifty Bob Shop Limited.
19.	On 13 August 2004 Mr Reilly informed Mr Rodgers in writing that he was of the view that the Appellant acquired the business of Fifty Bob Shop Limited as a going concern, and was, therefore, liable to be registered for VAT. Mr Rodgers was invited to complete the requisite registration forms or supply details of the actual legal entity that took over the leases and assumed financial responsibility for the gross takings since the start of the business. Mr Rodgers did not respond with the result that Mr Reilly compulsorily registered the Appellant for VAT with effect from 6 August 2004.  The Appellant was informed of the compulsory registration by Notice dated 10 September 2004.
20.	Mr Reilly informed the Respondents’ VAT Security Unit of the Appellant’s purchase of the assets and business of Fifty Bob Shop Limited. Mr Price of that Unit  decided that the Appellant posed a risk to the protection of the revenue. He based his decision on the following factors:
(1)	The substantial VAT debt owed by Fifty Bob Shop Limited.
(2)	The companies were run by the same principals, Mr Rodgers and Mr Holt.
(3)	The Appellant carried on the same business as Fifty Bob Shop Limited
(4)	The Appellant’s expected annual turnover of £800,000 with a potential output tax liability of £140,000.
21.	On 19 October 2004 Mr Price issued a Notice requiring the Appellant to pay a security in the sum of £48,500 or £32,300 if monthly returns were submitted.  On 11 November 2004 Miss Toothill of the Respondents’ Security Unit sent a further letter to the Appellant advising that it was liable to criminal action if it did not respond to the Notice requiring security. On 12 November 2004 PriceWaterhouseCoopers (PWC) wrote on behalf of the Appellant challenging the fact that the Appellant continued to operate as Fifty Bob Shop Limited with the staff as employees.  PWC also disputed the level of security. On 25 November 2004 PWC lodged a Notice of Appeal against the compulsory registration of the Appellant for VAT and against the level of security. On 14 January 2005 PWC emailed Mr Holt requesting that he provide the Respondents with details of the Appellant’s business including its contracts with the hairdressers.
22.	On 14 April 2005 the Respondents conducted further visits of the Appellant’s premises at Doncaster and Sheffield. The majority of hairdressers interviewed now stated that there were Independent Contractor Agreements in place between themselves and the Appellant. Under the agreement the hairdressers purported to pay a monthly charge of £600 for chair rental plus an additional service charge of one per cent of the monthly takes. The Appellant produced invoices for August 2004 to November 2004 for the chair rental and service charge.
23.	On 26 January 2006 Mr Reilly visited Barden Print Limited, which had printed the Appellant’s invoices. He established from Mrs Beaumont, the company secretary for Barden Print Limited, that the August 2004 invoices produced by the Appellant were taken from an invoice book, which was not printed until May 2005. 
24.	On 13 April 2006 Mr Reilly met with Mr Holt who stated that the Independent Contractor Agreements were not signed by the parties until November 2004. Further the contracts did not reflect the actuality of the arrangements with the hairdressers. The Appellant continued to retain 50 per cent of the turnover, which was supported by the entries on weekly taking sheets for the Keighley shop dated 14 November 2005 and 16 January and on the daily taking sheets for the Wakefield shop from 19 October to 2 February 2006. Mr Holt confirmed that the invoices for the chair rental were raised after the 50 per cent split had been effected, and were for fictitious amounts.
Findings of Fact
25.	We make the following findings of fact:
(1)	Fifty Bob Shop Limited was registered for VAT, and the value of its taxable supplies in the one year preceding the sale of its assets to the Appellant was above the registration threshold of £56,000.
(2)	Fifty Bob Shop Limited went into liquidation owing the Respondents £536,000 in unpaid VAT.  
(3)	The Appellant purchased the assets of Fifty Bob Shop Limited, and carried on the hairdressing business of Fifty Bob Shop Limited without a break in trading.
(4)	Fifty Bob Shop Limited transferred its business to the Appellant as a going concern.
(5)	Fifty Bob Shop Limited were controlled by the same principals, Mr Rodgers, as the sole company director and Mr Holt, as company secretary.
(6)	The Appellant controlled the working arrangements for the hairdressers. The Appellant fixed the prices for the hair cuts, organised the working hours of the hairdressers, provided the equipment, and determined their rate of remuneration.
(7)	The Independent Contractor Agreements produced by the Appellant company were not in existence at the time the Appellant commenced its hairdressing business. The Agreements did not reflect the true nature of the relationship between the Appellant and the hairdressers. The weekly and daily takings sheets for the Keighley and Wakefield shops demonstrated that even in 2006 the hairdressers’ remuneration continued to be based on the weekly takings. The takings sheets and the printers’ evidence regarding the date of printing of the invoice books undermined the Appellant’s assertion that it operated as a property letting business, levying chair rentals and one per cent service charge against the hairdressers. We are satisfied that the agreements and invoices supplied by the Appellant were sham documents. The Appellant produced these documents with the intention of disguising its true relationship with the hairdressers working in its premises.
(8)	 The information supplied by the hairdressers in their April 2005 interviews was generally not consistent with their accounts given in the August 2004 interviews. In April 2005 the majority of hairdressers interviewed suggested that they were responsible for the prices charged and they paid the Appellant a chair rental of £150 per week. However, the Doncaster hairdressers still maintained in April 2005 that it was their boss, Kevin, who decided the prices and that they received 50 per cent of the takings. We are satisfied that those hairdressers who gave a different account of the arrangements between themselves and the Appellant were not telling the truth in April 2005. We prefer the evidence of their August interviews, which we consider to be consistent with the overall evidence given in this case. 
(9)	We placed no weight on the written submissions of Mr Rodgers. Essentially he blamed Mr Holt for not putting the correct arrangements in place. Mr Rodgers as sole company director was responsible for the arrangements. Further Mr Rodgers did not avail himself of the opportunity given by Mr Reilly in August 2004 to provide information which established that the Appellant was operating as a property leasing company rather than as hairdressers. The only time that Mr Rodgers contacted the Respondents was in November 2004 which was immediately after the threat of criminal proceedings for non-compliance with the security requirement. We are satisfied from the evidence that Mr Rodgers was aware that the Appellant was supplying hairdressing services direct to its customers. 
(10)	The hairdressers working in the Appellant’s premises were either employed by the Appellant or sub-contactors making supplies to the Appellant. The hairdressers were not independent contractors. 
(11)	The Appellant supplied the hairdressing services to the customers and was liable for the payment of VAT on those supplies.
(12)	The Appellant’s expected annual turnover from its hairdressing business was in the region of £800,000 which had a potential output tax liability of £140,000.
Reasons for Our Decision
26.	Under paragraph 1(2) of schedule 1 of the Value Added Tax Act 1994 where a business is carried on by a taxable person is transferred to another person as a going concern, and the transferee is not registered under this Act at the time of transfer, then the transferee becomes liable to be registered for VAT. Paragraph 7(2) of schedule 1 empowers the Respondents to register an unregistered transferee from the time when the business is transferred.
27.	We found that Fifty Bob Shop Limited was a taxable person, having been compulsorily registered for VAT and that it transferred its business as a going concern to the Appellant. As the Appellant was not registered at the time of the transfer of the business, the Respondents were entitled to register the Appellant compulsorily for VAT pursuant to paragraph 7(2) of schedule 1 of the 1994 Act.
28.	Under paragraph 1(3) of schedule 1 of the 1994 Act, a transferee does not become liable to be registered under paragraph 1(2) of schedule 1 if the Respondents are satisfied that the value of his taxable supplies in the period of one year beginning at the date of transfer of the business would not exceed the threshold limit for registration, which was £56,000 for the tax year of 2004/05. The High Court in Gray (trading as William Gray & Son) v Customs and Excise Commissioners [2000] STC 880 – 891 decided at page 887:
“… the commissioners must give effect to paragraph 1(3) by considering the case as at the date from which registration would otherwise take effect and, by looking forward, asking themselves whether they are or are not satisfied that turnover will not exceed the threshold amount. Obviously they cannot do this otherwise than on the basis of what they consider to be likely. But if they reach a conclusion which would be open to a reasonable body of commissioners considering the relevant evidence, an appellate tribunal cannot interfere with their decision. It is not enough that the Appellate tribunal thinks that it would have reached a different conclusion on the same evidence.
29.	 Thus the question that we have to determine is the reasonableness of Mr Reilly’s decision that the Appellant’s taxable supplies would exceed the threshold limit of £56,000 in the period of one year from the date of the transfer of the going concern. In order for the decision to have been reasonable Mr Reilly must have considered all relevant matters and disregarded irrelevant matters.
30.	Ordinarily there are three possible categories of hairdressers for VAT purposes:
(1)	Those hairdressers who are employed by a salon and who provide services to customers on behalf of the salon.
(2)	Those hairdressers who supply services to a salon under a contract of services. The salon then supplies the services to the customer, and
(3)	Those hairdressers who supply services directly to the customer. 
31.	The Respondents have agreed guidelines with the National Hairdressers’ Federation in October 1992, which set out the factors for determining whether the hairdresser is supplying the services direct to the customer or on behalf of the salon.
32.	Mr Reilly and his colleagues carried out an investigation into how the Appellant ran its hairdressing shops. As part of the investigation in August 2004 interviews were conducted with the hairdressers with the questions based upon the factors identified in the guidance agreed with the National Hairdressers’ Federation. Mr Reilly concluded from the information collected in the interviews that the hairdressers were either employees or sub-contractors of the Appellant. Thus the Appellant was supplying the hairdressing services direct to the customers of its shops, and that the expected annual turnover of its business would be £800,000, considerably above the threshold limit of £56,000.
33.	Our findings of fact supported Mr Reilly’s conclusion, and we are satisfied that his decision that the Appellant would exceed the threshold limit in the period of one year from the date of transfer was reasonable.
34.	Thus we have decided that
(1)	Fifty Bob Shop was a taxable person which transferred its business as a going concern to the Appellant.
(2)	The Appellant was liable to be compulsorily registered for VAT pursuant to paragraph 1(2) of schedule 1 of the VAT Act 1994.
(3)	The Respondents were required to register the Appellant’s business with effect from the time when the business was transferred.
(4)	The Respondents’ decision that the Appellant’s taxable supplies would exceed the registration threshold in period of one year from the date of transfer was reasonable.
35.	In view of our decisions in paragraph 34 we are satisfied that the Respondents’ decision to register the Appellant compulsorily for VAT with effect from 6 August 2004 was correct in fact and in law.
36.	Paragraph 4(2), Schedule 11, of the Value Added Tax Act 1994 enables the Respondents to require a security from a taxable person as a condition of making taxable supplies if they think the security is necessary for the protection of the revenue.
37.	Mr Price based his decision to require a security from the Appellant on the following factors:
(1)	The substantial VAT debt owed by Fifty Bob Shop Limited.
(2)	The companies were run by the same principals, Mr Rodgers and Mr Holt.
(3)	The Appellant carried on the same business as Fifty Bob Shop Limited
(4)	The Appellant’s expected annual turnover of £800,000 with a potential output tax liability of £140,000.
38.	Our starting point is to consider whether Mr Price acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he took into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement for the protection of the revenue on the Appellant company on the 19 October 2004. In exercising our jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken. We are unable to substitute our own discretion for that of the Commissioners. Our task is to decide whether the decision of Mr Price was reasonable.
39.	We consider the factors taken into account by Mr Price were firmly based on the facts of this Appeal and demonstrated that the Appellant posed a significant risk to the protection of the revenue. The Appellant contested the security on the ground that it did not make the taxable hairdressing supplies to the customer. Our findings of fact disagreed with the Appellant’s assertion.
40.	We consider that Mr Price was correct in giving weight to these facts identified in paragraph 37 above when imposing the security. In our view they were relevant in assessing the Appellant’s risk to the protection of the revenue. We find no evidence that Mr Price took into account some irrelevant matter or disregarded something to which he should have given weight in coming to his decision on the 19 October 2004. We are also satisfied that the amount of security required in the sum of £48,500 or £32,300, if monthly returns were submitted, were proportionate to that risk.
41.	We hold that the issue of the Notice of Security dated 19 October 2004 on the Appellant was reasonable. 
Decision
42.	 We  decide that
(1)	The Respondents’ decision to register the Appellant compulsorily for VAT with effect from 6 August 2004 was both correct in fact and in law.
(2)	The issue of the Notice of Security dated 19 October 2004 was reasonable.
43.	 We, therefore, dismiss the Appeal.
44.	The Respondents applied for their costs in relation to this Appeal. Respondents’ Counsel considered that the Appellant flagrantly abused the procedures of the Tribunal.  The Respondents investigation of the Appellant’s VAT position involved substantial manpower with significant sums of money at stake. The Appellant  sought to mislead the Respondents with the issue of false invoices and contracts. The Appellant did not co-operate with the Respondents to ensure an earlier resolution of the dispute. The Appellant did not inform beforehand the Respondents or the Tribunal  of its intention not to appear or be represented at the Appeal hearing, with the result that valuable tribunal time was lost and unnecessary public expense  incurred by the three day hearing going short.
45.	The general rule regarding costs that prevails in the Tribunal was set out in a statement made in Parliament  by the Minister of State, The Hon. Peter Brook MP, recorded in Hansard Vol.102, 24 July 1986 Cols 459 – 460.
46.	The general rule is that the Respondents will not seek costs against unsuccessful Appellants unless:
(1)	The Appeal was exceptional in terms of its complexity and involved large sums of money.
(2)	If a case falls under (1) above did it involve an important general point of law requiring clarification, thus taking it out of (1) above.
(3)	The Appellant misused Tribunal Procedure, for example, bringing a frivolous or vexatious case or failing to appear or not disclosing relevant evidence until the Appeal hearing.
47.	 We are satisfied that the Appellant misused Tribunal procedure. The Appellant’s appeal was without merit. In our view there was clear evidence that it attempted to disguise the reality of its operations by the use of falsified documentation. The Appellant, in our view, never intended to attend the Tribunal and prosecute the Appeal with the result that considerable public expense was incurred unnecessarily. We, therefore, order the Appellant to pay the Respondents’ costs in connection with this Appeal. If the costs cannot be agreed between the parties or the Appellant fails to respond to the Respondents’ requests to agree the costs, we give leave for either party to apply to the Tribunal to determine the costs.  

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 26 October 2006

MAN/04/7012